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CFPB Attacks Cross-Collateral Clause

Aug 9, 2023 | SVL Newsletter

On July 26, 2023, the Consumer Financial Protection Bureau (CFPB) issued a new Supervisory Highlights Report (Summer 2023). This report provides insight into recent CFPB examinations, including issues or activities the Bureau seeks to highlight. As the Director stated, “Today’s report furthers our efforts to highlight conduct that violates federal law, including the prohibition on abusive practices in consumer financial services.”

The Summer 2023 Supervisory Highlights Report addresses the following issues: auto origination and servicing, consumer reporting, debt collection, deposits, Fair Lending, information technology, mortgage origination and servicing, payday and small-dollar lending, and remittances. I will highlight the issues that impact a Credit Union’s collection departments. The CFPB’s pronouncements regarding use of a cross-collateral clause in certain situations will be of particular interest.

The CFPB found the following instances of unfair or abusive acts or practices by auto loan services:

  • Charging fraudulent interest on inflated loan balances;
  • Canceling automatic payments without sufficient notice, leading to unavoidable late fees;
  • Engaging in illegal collection practices after repossession.

The illegal collection practices identified by the CFPB involved enforcement of a cross-collateral clause. The CFPB was concerned with servicers who refused to allow the consumer to redeem the vehicle for the auto loan balance. In the identified situation, the servicers required that the borrower pay the full balance of the auto loan and the other cross-collateralized loan. The CFPB stated that using the cross-collateral clause in this manner is unfair and abusive.

This is the first time the CFPB has addressed the use of a cross-collateral clause. The CFPB did not indicate when and where the use of a cross-collateral clause would be legal. The CFPB did not suggest that a cross-collateral clause is always unfair and abusive. Thus, we conclude that there are situations where the use of a cross-collateral clause is legal. When and where that clause is legal remains to be seen and further guidance from the CFPB is needed.

Regarding consumer credit reporting, the CFPB found that creditors have failed in their duties under the Fair Credit Reporting Act by failing to periodically review and update their policies and procedures regarding credit reporting and credit disputes. The Bureau also found that creditors were failing to conduct a reasonable investigation of direct disputes, failing to notify consumers that a dispute had been determined to be frivolous or irrelevant, and failing to identify the additional information needed to investigate a dispute.

In addition, the CFPB found lenders whose dispute handling process had changed but the policies and procedures had not been changed. This is a reminder to schedule regular reviews of policies and procedures to be sure they reflect current practices and comply with applicable law. For instance, it is time for a re-draft if your policies and procedures do not reflect your current practices.

The additional areas of concern addressed by the CFPB in the Supervisory Highlights included:  concerns about fair lending, involving pricing discrimination and discriminatory lending restrictions; lenders who failed to implement adequate information technology security controls; mortgage origination and mortgage servicing compliance; and failure to comply with the Remittance Rule under Regulation E. A full copy of the Supervisory Highlights can be found here.

Sorenson Van Leuven will continue to monitor CFPB advice and provide additional guidance regarding the use of cross-collateral clauses. If you have further questions or would like us to review your current use of a cross-collateral clause, please do not hesitate to contact one of our lawyers.